Question

Your money is tied up and you need to borrow $10,000. The following two alternatives are being offered by the lender:
(1) pay $3,288.91 at the end of each year for 5 years, starting at the end of the first year (5 payments total at 18 percent
nominal per year compounded quarterly which equates to 19.25% effective); or (2) pay $X at the end of each quarter for 6
years, starting at the end of the first quarter (24 payments total at 18 percent nominal per year compounded quarterly).
Determine the value of $X that will make Alternative 2 equally desirable to Alternative 1 if
a. your TVOM is 8 percent nominal per year compounded quarterly.
b. your TVOM is 22 percent nominal per year compounded quarterly

Answer 1

• If TVOM is 8% then value of X that is quarterly payment is calculated in excel and screen shot provided below:

  

  If TVOM is 8% then value of X that is quarterly payment is $611.57.

  Again,

  If TVOM is 22% then value of X that is quarterly payment is calculated in excel and screen shot provided below:

  

  If TVOM is 22% then value of X that is quarterly payment is $836.79